 REPEAT-O-TYPE MANUFACTURING CORPORATION |
REPEAT-O-TYPE MANUFACTURING CORPORATION |
Repeat-O-Type General Business Tips
When to Take Advantage of a Vendor's Discount
When faced with the question of whether or not to take a vendor's discount, it is necessary to weigh the advantages of borrowing money against the actual value of the discount being offered.
Following is a formula for calculating the "Effective Annual Interest Rate" that we obtained from the National Association of Credit Managers in Baltimore, Maryland:
Where D = Vendor's Discount Percentage Rate and
DP = Discount Period in days and
NP = Net Period in days and
360 Days = Payment Year,If (360xD)/(NP-DP) is greater than the annual interest rate charged by your bank, the discount is financially advantageous.
Example:
If the terms being offered are 2% 10, Net 30, the formula would calculate as follows:
D = 2% or 0.02
DP = 10 Days
NP = 30 Days(360 x 0.02)/(30-10) = 7.20/20 = 0.36 or 36% per year
If you have the funds, or the credit, available to you at any rate less than 36% per year, it would be financially worth your while to take advantage of the discount being offered in the case above.
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